Q2 2022 Syneos Health Inc Earnings Call
Okay.
Good morning, and welcome to the C Gnosis health.
Second quarter 2022 earnings conference call at this time, all participants are in a listen only mode.
We will conduct a question and answer session and instructions will be given at that time.
I would now like to hand, the conference over to Ronnie Speight Senior Vice President of Investor Relations. Please go ahead Sir.
Okay.
Good morning, everyone with me on the call today are Michelle Keefe, our CEO , Jason Meggs, our CFO and Michael Brooks our CFO .
In addition to the press release, a slide presentation corresponding to our prepared remarks is available on our website at investor <unk> yourself Dot com.
Remarks that we make about future expectations growth trends anticipated financial results and expectations regarding the COVID-19 pandemic and the war in Ukraine constitute forward looking statements for purposes of the Safe Harbor provisions under the private Securities Litigation Reform Act of 1995, and we disclaim.
Any obligation to update them.
Actual results may differ materially from those indicated by these forward looking statements as a result of various important factors.
These factors are discussed in the risk factors section of our Form 10-K for the year ended December 31, 2021, and our other SEC filings.
During this call we will discuss certain non-GAAP financial measures, which exclude the effects of advanced central exactions, we consider to be outside of our core operations.
These non-GAAP measures should be considered a supplement to and not a replacement for measures prepared in accordance with GAAP.
A reconciliation of non-GAAP financial measures with the most directly comparable GAAP measures. Please refer to the appendix of our presentation.
I would now like to turn the call over to Michelle Keefe Michelle.
Ronnie and good morning.
Everyone and thank you for joining us today.
Health delivered another solid quarter, despite incremental revenue growth headwinds from foreign exchange and Reimbursable expenses related to our Covid vaccine portfolio, which Jason will address in more detail.
We continue to advance our integrated value proposition working across the organization to accelerate product development for our customers.
Before I discuss several takeaways from my first few months as CEO .
Wanted to share our view of the macro environment.
Market demand is healthy and our pipeline of opportunities remains comparable to 2021.
Specific to our clinical Smith portfolio, our total pipeline of opportunities is up double digits compared to 2021, and we had record net awards during Q4 'twenty one in Q1 'twenty two.
We experienced delays in customer award decisions.
In the second quarter, and some moderation in RFP flow.
And large pharma, we have double digit growth in our TTM RFP flow and are encouraged by the number of opportunities to win additional preferred provider relationships and.
And service areas, including clinical monitoring pharmacovigilance and biometrics.
We also saw delays in large pharma award decisions in the second quarter.
We believe the higher than normal award delays are a.
Product of customers, taking a more deliberate approach to their development plans.
Our clinical win rates remained consistent with prior periods.
Given our clinical TTM book to Bill of 129 times, and 12, 1% backlog growth excluding reimbursable expenses.
As well as the market indicators, we remain confident about our ability to drive clinical growth.
The commercial business remains strong.
And poised for further growth.
As I shared with you last quarter I've been spending time listening to our key stakeholders customers employees and investors.
Further inform my view about our business organic investments and where the industry is headed next.
These discussions has validated my confidence in our culture and long term strategy.
We are continuing to focus on delivering the right mix of capabilities at the right time.
While building, an even more intelligent technology enabled approach to better serve our customers.
Let me share with you what I've learned.
First.
Customers are looking to partner with a solutions provider, who can deliver data driven integrated solutions that leverage the right technologies to address their opportunities.
And partnering with <unk> health, they understand and appreciate our unique value proposition.
Where we work across the product development continuum to create customized solutions.
This is becoming increasingly important as they address more complex therapeutic areas.
Where our integrated clinical and medical affairs to commercial capabilities matter.
Our next step is to further invest in and grow our medical affairs offering and continue to invest in our technology enabled intelligence solutions specifically.
Specifically targeting large pharma, while maintaining our leadership position and Smith.
Second the people who power these innovative solutions our employees are passionate about delivering customized high quality solutions that.
Solve complex customer problems.
As we continue to simplify and streamline the business our priority will be to provide ongoing professional development for our colleagues with a focus on building diverse teams and our highly engaged culture, which leads to high performance.
Third our investors recognize the advantages of our strategy and believe continued execution will drive growth and unlock shareholder value.
As we consistently execute our strategy and deliver results, we will communicate transparently and share our progress against our goal.
We are committed to these strategic initiatives and are accelerating investments during 2022, and 2023 to drive further performance and consistency.
As a result of those conversations my focus is.
Streamlining operations for innovation integration and simplification.
Youre already seeing this in my appointment of Michael Brooks at C. L.
To seamlessly lead across our product development continuum.
Michael has made significant progress with our clinical <unk> initiative realigning the leadership team and redesigning the organizational structure.
Hmm processes and innovation to fuel growth.
We plan to increase our investments in this initiative and expand these efforts across the enterprise.
Next.
In addition to leading our forward bound program, Jason is partnering with the business leaders to implement a unified cloud based enterprise resource planning platform.
This initiative will encompass resource management, human resources, finance and procurement driving simplification automation improved visibility and margin enhancement.
We have selected the best platform and partners in the market and have a strong dedicated internal team to drive this transformational initiative.
Finally, further digitalization our capabilities to unlock additional value.
Under the direction of Baba Shetty President of technology and data solutions will continue.
To make investments that we believe will allow us to design and develop new systems and solutions across the company.
We have already seen firsthand, how our recent technology acquisitions, such as Rx data science have given us new rapid development capabilities, particularly for advanced analytics and AI use cases.
Given these early successes I believe there are many possibilities for technology and data to drive performance in our business.
Capitalized we are conducting an in depth assessment of other opportunities to accelerate value creation and builds a more intelligent enterprise leveraging AI to guide operational decisions we.
Pate this will drive growth and margin accretion as we launch new solutions over the coming quarters.
And to further our strategy and capitalize on our unique market opportunity I am delighted to have recently appointed Christian to cat as Chief business Officer.
Christian is the architect of our innovative <unk>, one offering and a global operations leader with significant global business development experience.
His ability to lead with a product development mindset will enhance our single service integrated end to end offerings.
We continue to see large pharma penetration in our clinical business as our most impactful organic growth opportunity.
<unk> and the team will continue to focus in this area.
I expect these gulfport actions and accelerated investments well.
Transform the customer facing experience as we accelerate digital enablement and automation and further penetrate large pharma.
<unk> provides incremental long term growth, while realizing the impact of our forward bound margin enhancement program as we move through 2023 and beyond.
This is the right team.
With the right culture.
Ready to execute and accelerate our strategy.
We are moving forward with a shared vision and purpose I look forward to sharing updates on these strategic initiatives and investments as we progress through the coming quarters.
Now some key observations from this quarter's results.
First we maintained strong backlog growth in both businesses, excluding reimbursable expenses, driven by 12, 1% growth in clinical solutions, and 19, 6% and commercial solutions.
Second the strength in our commercial solutions business continued driven primarily by deployment solutions and the sending us one portfolio, resulting in 15, 7% revenue growth.
Third we had a strong quarter of operating cash flow at $99 9 million, allowing us to repay $95 million of our outstanding debt and reducing our net leverage to three four times at the end of the quarter.
Now moving into further details on our results.
We delivered total company year over year revenue growth of six 1% for the second quarter driven by robust growth across both segments, which was partially offset by the impact of clinical reimbursable expenses and.
In clinical solutions revenue grew three 3% compared to the second quarter of 2021, including the impact of acquisitions excluding.
Excluding reimbursable expenses clinical solutions revenue grew nine 6%.
Our growth was primarily driven by strength in our top 50 pharma customers, including FSP and the continued ramp in our key large pharma relationships we.
We are excited about the progress we are making on our top 50 pharma strategy, including our recent sole provider pharmacovigilance partnership scheduled to start towards the end of this year and the rapid expansion of another relatively new clinical partnership we continue to enhance our go to market approach for large pharma leveraging our unique.
Breath of product development expertise and flexible customized operating model that accommodate their individual outsourcing needs.
Even with these continued successes our net awards for the quarter were impacted by higher than normal delays in customer decisions as cancellations were within our normal range.
Clinical solutions book to Bill ratio was one six times for the second quarter, excluding Reimbursable expenses, maintaining a 129 times TTM book to Bill at the upper end of our target range.
As I mentioned, we are aggressively driving our clinical re imagine program accelerating our initiatives to streamline the organization simplify processes and drive automation projects.
These initiatives are focused on driving efficiency and margin enhancement, while optimizing delivery for our customers.
This includes simplifying our structure and ensuring our leaders are closely aligned to the execution of customer projects.
While enhancing our underlying technology and data capabilities as part of our accelerated investments.
We believe these initiatives are already improving our employee engagement is evident in their feedback and improving retention and are consistent with the sending us health culture.
Turning to commercial solutions revenue growth remained strong this quarter at 15, 7% compared to 2021 <unk>.
Commercial growth was primarily driven by global growth in deployment solutions fueled by continued strength in our smid customer segment, including the contribution from our <unk> portfolio.
With another strong quarter of new teams start deployment solutions reached a new five year high and deployed resources spanning a variety of specialized types of professionals across our field teams and in our engagement center. The commercial team also had a solid quarter of net awards.
<unk> with our normal seasonality, resulting in a book to Bill ratio of <unk> 83 times for the quarter and $1. One one times on a trailing 12 month basis, excluding reimbursable expenses.
In closing I want to thank all of my 29000 city hotels colleagues for their energy and collaboration as we move forward together to drive performance every day, we remain confident in our market positioning and growth initiatives and look forward to successfully.
Delivering projects for our customers and their patients.
Jason will now provide additional comments on our financial performance and guidance.
Jason.
Thank you Michelle and good morning, everyone.
Total revenue for the second quarter of 2022 was 136 billion.
Up six 1% and eight 3% in constant currency compared to the second quarter of 2021.
Excluding reimbursable expenses and on a constant currency basis, our revenue increased 12, 4% compared to the second quarter of 2021.
Revenue came in below the midpoint of our guidance due to lower reimbursable expenses, and clinical solutions and incremental headwinds from foreign exchange.
The unexpected headwind and Reimbursable expenses was primarily related to lower investigator payments on our covered portfolio.
Including the impact of regulatory delays and the early wind down of a large program.
That said, our adjusted EBITDA margin came in above our expectation given the lack of margin associated with Reimbursable expenses as well as robust growth in the underlying business.
Our clinical solutions revenue for the second quarter was $1 3 billion up three 3% as reported or.
Or five 6% in constant currency compared to the second quarter of 2021.
Excluding reimbursable expenses and on a constant currency basis clinical solutions revenue increased 11, 7%.
These increases were driven by growth across our full service and FSP portfolios with particular strength in our top 50 pharma customers.
Total as reported clinical revenue growth includes a 90 basis point contribution from acquisitions, and a 630 basis point headwind from Reimbursable expenses.
Our second quarter commercial solutions revenue was $335 million up 15, 7% or 17, 5% in constant currency compared to the second quarter of 2021.
Excluding reimbursable and on a constant currency basis commercial solutions revenue increased 14, 2%.
Growth in commercial revenue was driven primarily by deployment solutions, including a growing contribution from the commercialization of our <unk> portfolio.
Yeah.
Total as reported commercial revenue growth also included a tailwind of 330 basis points from Reimbursable expenses.
Adjusted EBITDA for the second quarter increased 19, 2% to $208 1 million.
And adjusted EBITDA margin of 15, 3%.
An increase of 170 basis points compared to the second quarter of 2021.
The increase in adjusted EBITDA margin for the second quarter was primarily the result of the benefits of revenue growth foreign exchange forward bound and Reimbursable expenses.
Partially offset by a less favorable revenue mix use of contractors and the impact of organic investments.
In addition, unadjusted EBITDA for the second quarter was $183 million, an increase of 39, 3% compared to the prior year.
Adjusted diluted EPS of $1 25 for the second quarter increased 28, 9% year over year, primarily driven by the increase in adjusted EBITDA and lower interest expense.
Operating cash flow was $99 9 million for the second quarter, an increase of 12, 6% compared to prior year, driven primarily by the timing of collections activity during the first half of the year.
Partially offset by increased cash taxes as we begin to fully utilize our net operating losses this year.
DSO was 48, one days increasing from the prior year, mostly driven by increased growth in accounts receivable related to large pharma customers with longer payment terms.
Our capital expenditures were $24 4 million for the second quarter.
During the second quarter, we repaid $95 million of our outstanding debt.
We ended the quarter with $105 9 million of unrestricted cash and total debt outstanding of $2 eight 9 billion.
Resulting in net leverage of three four times.
In addition, during the quarter, our board approved a new share repurchase authorization of $350 million available through the end of 2024.
Primarily designed to provide for our goal of offsetting the annual dilution from our equity compensation programs.
Our non-GAAP effective tax rate for the second quarter was 23, 5% consistent with our estimate for the full year 2022.
Turning now to our updated 2022 guidance. This updated guidance contemplates our current view of the estimated impacts of ongoing developments, including the COVID-19 pandemic the war in Ukraine, and the related Russian sanctions and the evolving interest rate foreign exchange and inflationary environments.
Our updated guidance is based on foreign exchange rates as of July 15th.
We now expect total revenue of $5 44 billion to $5 five 4 billion.
Representing growth of four 4% to six 3%.
It is important to note that we have reduced our as reported revenue guidance due to our current expectations for the incremental impacts of foreign exchange and lower clinical Reimbursable expenses.
Primarily related to changes in our Covid portfolio.
An important point to highlight our expectation for constant currency revenue growth. Excluding reimbursable expenses remains unchanged from what was included in our prior guidance.
Total revenue growth includes the estimated contribution from acquisitions of approximately 70 basis points.
And an estimated net headwind of 460 basis points from Reimbursable expenses.
We now expect our total adjusted EBITDA to range from $835 million to $865 million.
This reflects an adjusted EBITDA margin of 15, 3% to 15, 6% up approximately 80 basis points from 2021.
Lastly, we now expect adjusted diluted EPS to range from $4 97.
The $5 11, representing year over year growth of 11, 4% to 14, 6%.
These revisions to adjusted EBITDA and adjusted EPS are made to reflect the accelerated investments in our operations during the second half of 2022.
As Michel highlighted we're accelerating investments in the following key areas.
Clinical re imagined met.
Medical Affairs business development, and technology and data solutions.
All designed to enhance scalability and operational excellence, while driving long term growth and margin enhancement.
Our guidance incorporates interest expense of $77 million to $86 million. This range is based upon current market forecast for LIBOR and reflects a 40% of our debt is currently variable rate.
Guidance also assumes a non-GAAP effective tax rate of 23, 5% and an estimated diluted share count of $103 6 million shares.
We expect our net cash outlay for income taxes during 2020 to be approximately $75 million.
We expect third quarter revenue of 1.3 dollars 65 billion to $1 395 billion.
In total adjusted EBITDA of $220 million to $230 million.
This reflects as reported revenue growth of one 2% to three 5%.
And adjusted EBITDA growth of eight 6% to 13, 5% compared to the third quarter of 2021.
Excluding reimbursable expenses and on a constant currency basis. This reflects expected revenue growth of approximately 12, 6% compared to the third quarter of 2021.
This revenue growth includes an estimated contribution from acquisitions of approximately 90 basis points.
And expected foreign exchange headwind of $37 million and unexpected headwind of approximately 770 basis points due to reimbursable expenses.
I'm now going to turn it back over to Michel for some final comments Michelle.
Sure.
I committed to you when I was appointed as CEO that I would evaluate what we need to do to drive long term success.
As I have outlined we are taking decisive action we.
We are committed to making the appropriate investments to drive long term growth and margin expansion.
This completes our prepared remarks, and we'd be happy to answer any questions operator.
Thank you, ladies and gentlemen, if you would like to ask a question. Please press star one on your Touchtone telephone again, if you'd like to ask a question. Please press star 111.
One moment for our first question.
Our first question comes from Luke surrogate of Barclays. Your line is open.
Mr Surrogate of Barclays. Your line is open.
I didn't hear the operator's voice good morning, everybody. Thanks for the question Michel just to follow up on the.
The actions that you're taking in laying out for the future can you flesh out any of this is to <unk>.
There are some numbers around it or is this more of just.
Operational kind of reorganization for more efficiency.
Hey, Luke nice to hear your voice. Thank you for the question. So a couple of things yes.
Core areas, we outlined right where business development Medical affairs clinical re imagined and our data and tech.
Team as well for.
Additional investment so.
We're planning on really laying all that out for you in early 2023 as we.
Put together, our 2023 to 2025 strategic plan. However, I can tell you that.
We're we're accelerating the remainder of the year is and really doubling down on clinical re imagined Michael is having a lot of early success.
On some of the things that he is doing in that particular initiative and so we're going to double down there.
Having early success as well in medical affairs and some of the.
Things that we are developing in our data and tech solution stack. So.
That's where some of the investment from an acceleration perspective is happening in the back half of 2022, but I'll, let Mike will give you a little more color on what he's doing with clinical re imagined sure. Thanks, Vishal I look.
So first of all we're really pleased with the results that we've achieved so far this year with investments in our people and our technology clinical re imagined was actually born from feedback we received from our customers. So I was talking to the small mid size large customers what are they looking forward a post COVID-19 world what are the frustrations that there.
<unk> seen from other clinical providers and vendors.
So one opportunity we saw an opportunity to better engage with our people to develop.
New classes job families.
To actually invest and how we can provide better decision analytics greater visibility to our project critical path, bringing our patient and healthcare provider inside forward in clinical development, which is really the superpower of organization. If you think about what we do in commercial vertically and medical affairs vertically and clinical vertically and then I wanted to bring those across.
Each other and we're getting really good results already in terms of our sales cycles.
Being able to accelerate patient recruitment in certain.
<unk> and things of that nature.
Thanks, Michael.
Okay. Thanks, and then just one last one here you guys talked about the delays in Smiths.
<unk> kind of.
Smaller peers on the on them.
Said earlier in the week and then the large pharma delays. This is new to the rest of the space. So can you talk about what youre seeing there and maybe how you guys are positioned where they arent.
Is it a specific indication or is it just your strategic relationships.
You just unpack that a little bit for us. Please.
Sure look okay. So a couple of things I'll start with large pharma I think thats, where we can start so as you know we've been very focused on winning large pharma partnerships I think we've been very transparent that we are undersized and the number of large pharma partnerships that we have and we feel like thats, our greatest growth opportunity and so.
No.
Working with them to ensure that we have are our win in Q1 of <unk>.
Added an additional large pharma partnership and Thats starting to ramp now.
So we're going to continue to focus on winning those large pharma partnerships and I'll, let Michael give you some color on that in a second.
In regards to.
Our smid portfolio.
Have some delayed decisions and our smid portfolio, but I think it's important to note that of the awards that were.
One in Q2, we actually kept our hitting our strike rate in that particular segment. So we continue to have strength, there, but I'll, let Michael give you a little more color on the large pharma strategy. Yes, absolutely. There is two key things that are going on right. Now is we are in active discussions with several customers around potential preferred or sole provider opportunities.
That includes the clinical monitoring and pharmacovigilance.
And in records management.
And in fact, we're really pleased in the second quarter to add a sole provider partnership.
The safety space and so right now we're working with that customer around the strategy for consolidating the existing work, bringing it over to us estimating the volumes given that kicked off at the end of this year.
That phenomenon Thats actually really interesting as well is that there are customers that were currently locked out because the contracts are with other providers, but they are contacting us now about potential.
Potential opportunities that are not a part of those partnerships. They are really interested our therapeutic expertise they're interested in our commercial insight.
There was one example, we added Q2, where we won a large phase III, even though we were not a preferred provider.
Currently offer that customer so it's really interesting how they're engaging with us in different ways now.
Okay, great. Thanks.
Thank you.
Our next question comes from Dave Windley of Jefferies. Your line is open.
Okay.
Let's start there where Luke ended off Michelle in your opening remarks, you talked about.
The 22 pipeline being comparable to 'twenty one.
If you correct me, where I'm wrong, but I'm going to interpret pipeline as being kind of the sales funnel total Rfps received you said rfps for smid are up double digits. So am I right in thinking that large pharma is down.
Double digits or more is the offset to get back to kind of flat year over year helped me with the bridging there. Please.
Sure David Thanks for the question.
I don't think thats accurate, but I'm going to let Jason walk you through that from the pipeline, but you are correct that it is the total pipe that we shared the numbers on.
But a lot of this is delays, it's not decisions right. So I'm going to let let Jason kind of give you a little more color there.
Yeah. Thanks, Michele good morning, Dave.
On the pipeline comments being up that that is all in pipeline in terms of what was there.
Beginning of the quarter the RFP flow these delayed decisions et cetera, right. So that's the overall pipeline inclusive of RFP flow and activity.
You are correct in that in the top 50.
<unk>.
<unk> is down a bit and thats due to some of the award decisions and things of that nature and Thats. The reason, we laid out that the TTM large pharma RFP flow is up significantly year over year and the reason we believe that TTM.
Cadence is right there or timeframe is right. There is given the fact that we are still under.
Underweight in large pharma and need to continue to grow those partnerships, which Michael just walked you through.
So we do want to continue to see those partnerships come through.
And continue to have more opportunity to see more of the universe than we do today.
And back to Luke's comment or question.
Did have some large pharma delays in decisions as well.
One of those was related to a new opportunity that Michael outlined that we're looking to pull across the line.
In Q3 or Q4, and then the other was specific to strategic partnership that we do have already or are we just had some delays in their decisions for opportunities in the pipeline.
Okay. Thanks shifting to commercial we listened in on <unk>.
<unk> conference call and they seem to have.
Fairly positive comments about the early.
The early launch activities with them and I believe you guys have been public about that being a partner of yours, perhaps you could.
You could talk about how scenarios, one or full service launch type activities are progressing in general.
And the kind of the pending pipeline win when we might see additional layers folding into your revenue stream there.
Sure David Thanks, So I think we're very excited about our.
Our our Dorothy a partnership and we really appreciate the fact that they.
I have named us as their partner not just in the U S, but as imminent European launch.
Have a very.
Fulsome strategy for launching in the United States.
A really strong direct to consumer campaign to get right directly to the patients who are suffering from insomnia.
We're completely integrated with them and that messaging and that delivery and so we feel really good about that partnership and the opportunity that's going to bring frankly with other customers who are watching.
We're watching how rcs.
It's performing and so we're excited about that so that's the first thing we have.
We have not updated the sitting us one numbers, we will do that.
Coming months for January thing, because when we do the update there, but I think the last number we gave you David was overall three $3 billion pipeline.
Think 1.3 has already been taken into backlog and I think we still have like another one point whenever I'm not sure. The exact number I'll get you the exact numbers of opportunities still in front of us.
So we.
We have a nice I think over 25 assets sitting in clinical development right now <unk> and we're confident that based on the experience that we've had so far that.
If those make it through clinical development and they get it and theyre going to commercialize them that will have.
Our opportunity to work with those customers to commercialize those assets. So we still think it's.
A great feeder to commercial growth overtime.
Great I appreciate that.
Sorry go ahead, maybe do you have the numbers, Jason Yeah, just want to add a little bit of color. There. So on the on the.
Folding into the commercial revenue and things coming through the pipe. So we are.
In the process of launching.
Additional regions other doors here is as you know in terms of the.
The back half of this year and into next year, so that will fold in into.
Into the revenue as that stands out we have a couple more that are slotted in 2023.
That will launch if you go back and look at the last update as Michelle mentioned, we kind of lay out how they will fold in at this point none of those are as large in terms of volume as our doors. So theyre more I'll say again to the first launch we had in the second half of 'twenty, one is still very important.
I just don't have the same scale as the doors yet.
Okay. Thank you and if I could just ask one more quick one on on kind of numbers clarification.
Your I believe your revenue and expense by foreign exchange as a as a fairly widespread which would <unk>.
Typically yield positive benefit to EBITDA could you quantify the FX benefit to EBITDA for <unk> and then what's in the guidance. Thanks.
And while the Q2 benefit as the $1 $7 million, but maybe you can walk through guidance, Jason Yes. So on the Q2 margins. We obviously were pleased with with how we finished up with the margins where they were and we talked about in the prepared remarks the different contributions.
The FX benefit in quarter, two was less than $2 million as Michelle highlighted.
When we think about the back half.
What are the rates are right now it does increase.
Quite a bit Dave to your point on the EBITDA side.
We don't typically quantify it and guide we do quantify it when we report our actual results oftentimes in terms of the impact on the margins.
What I would say on the back half margins, though which I think is ultimately probably what you're interested in is that we will continue to see the benefits of growth in the business will continue to see the benefits of the pass through as being lower than we had expected in our April guide.
We'll continue to see the benefits of fall rebound and things of that nature that you have come to understand from US we are seeing a little bit of a mix headwind in the back half.
Specifically in commercial as deployment solutions is growing faster than the other businesses.
Relative to our April guide.
And then we're seeing a little bit on the <unk>.
Technology business unit side, where we've actually and this is within the M&A as well, we've actually pointed a little bit of that toward internal work versus focusing on the external work and thats a little bit of.
A margin headwind.
And then finally as Michael alluded to.
We are investing more in clinical re imagined.
And that can include what we're doing around overall employee cost and.
<unk>.
The retention planning.
That we need to do their investments and CRA training Academy type.
Type activity and I think Michael has said before right we need to invest on the front end or will invest on the back end and we're choosing to do it on the front end and.
And then Michele also outlined as well as I did that we're also investing incrementally.
In the business in the back half that takes us down to that $8 50, So all of that in the in the back half David is sort of the puts and takes on the on the margin side.
Got it. Thank you appreciate it.
Hey, Dave as Ronnie you asked one question earlier about the latest Scenius one numbers just to provide those quickly.
We reported those.
Mid year through $3 31, and that was currently.
$4 8 billion.
Total potential value and $875 million in TTM Awards contribution.
And then the first quarter.
Got it thank you.
Okay.
Steve.
Thank you.
Our next question comes from Patrick Donnelly of Citi. Your line is open.
Okay.
Hey, Thanks for taking the questions guys maybe.
Maybe another one on the large pharma side Michel I don't know if you can kind of quantify where talk a little bit about it seems like youre talking about maybe some delays some kind of targeted discussions where things are softening a little bit and then you also kind of during the prepared remarks that youre kind of seeing it broadly a more deliberate approach to development plans. There can you just talk about it.
Is it kind of more broad and large pharma, where youre seeing some slowdowns or is it more a few things here and there and overall things are still relatively healthy just trying to get a better sense of kind of the moving parts on that piece.
Yes. So yes. Thank you for the question I'm going to actually let Mike will walk you through it because Michael is really close to it. So go ahead, Michael sure on the clinical large pharma I would say it's much more the latter.
Here and there each of our customers.
Is reevaluating their strategic approach to the back half of this year and going into next year, whether that's acquisitions. They have made or may be making and how does that fit into their outsourcing strategy, whether it's the mix of FSP versus full service that they are looking at and even in a couple of instances there have been new leaders that have come in who are evaluating.
How they want to engage with their internal teams and engage external so as Jason mentioned, we got some several key opportunities custom.
Customers are delivery about how they want to outsource it to us what shape, it's going to look like what services things like that so I'm not seeing anything thats widespread across large pharma gives me any concern.
Okay. That's helpful.
And then Michel I think it was just kind of intra quarter in a couple of conferences you were talking about if things remain a little more muted on the funding environment.
You could see a scenario where things in 2023 kind of softened more mid single kind of putting out that scenario of things aren't a disaster, but they could soften a little bit I guess with what youre seeing now.
And kind of the large pharma deliberate approach I'd say.
Is that the right way to think about maybe just kind of help us frame. The 'twenty three scenarios given what youre seeing now. Thank you sure sure I could do that so if you recall the context of that conversation was the concern about the biotech funding index and as we shared in our.
In our prepared remarks that we believe the market demand remains healthy.
Not seeing anything that is making us concerned from a macro environment perspective, so I'll start there we.
We did say and it was kind of under the umbrella of the biotech funding environment, but it applies regardless of.
Where we get the business from that if our trailing 12 months book to Bill in clinical falls below one two.
For multiple quarters, we could see some softening.
Of the 2023 clinical growth profile.
Obviously, we're at a trailing 12 month of 129 for clinical development. So obviously, we're going to watch that closely.
Okay. Thank you.
Jason do you want to add something yes, I would just add to that Patrick just a little more color right.
Sure.
Sure.
We're in.
The early stages of what we do for 2023 budgeting purposes, and we tend to to think about trying to give some direction relative to what we're seeing when we release our Q3 earnings.
Don't see anything right now that would change.
<unk> sort of that timing.
As Michelle said healthy pipelines good backlog grows healthy end market, we're focused on execution in the back half right to set up.
2023 so.
That's what we're.
We continue to believe in what we said right. If we had multiple quarters of book to Bill below one point too.
That could bring in a mid single digit instead of seven to 10.
So still very much that's how we're thinking about it but we're just going to wait until we get through our process to provide a formal update.
Thank you.
Our next question comes from Kristine <unk> of William Blair. Your line is open.
Sure.
Christine range Youre line is open.
Hi, yes, thank you for taking the question.
My first one is just overall on what your strategy is to maintain or expand margins. If the company's commercial business continued to exhibit outsize growth as it has for the past several quarters how.
How do you come back the potential negative mix shift here.
Christine Thanks for the question I'll start and then if anybody wants to add and they can.
So when we're when we're looking at our margin expansion, obviously revenue growth helps us with margin expansion right because we get operating leverage so that's definitely an opportunity for us for sure.
I think secondly, you know that our forward bound initiative, which is around automation initiatives along with it.
Offshoring certain roles in the organization.
As Jason has shared in the past, we kind of got to that party late so there's still opportunity for us from a Florida bound perspective to continue.
Two.
<unk> opportunities in lower cost jurisdictions right. So we're going to continue to do that.
And so we feel confident that we can with the with the balance of the revenue growth along with operating leverage and forward bound.
That we can continue to deliver against the.
The growth in EBITDA, and I think you're even seeing in in Q2, but I don't know if that Jason wants to add or Michael.
Yes, so it's a good question and Michel hit on a lot of the points. There I think I would just add when we're looking at some of the investments that we talked through whether it's.
Our technology and data solutions.
Capabilities.
Our <unk>.
Enterprise resource planning capabilities, it's what we're doing in medical affairs.
All of those areas, even some of the areas say Asia Pac et cetera that are still under scale for us where we want to be and where we believe we can be.
Areas like real World, that's growing quickly and is an excellent opportunity within Med affairs as an example, as those businesses get to scale those investments mature.
There's going to be plenty of margin accretion opportunity across the business and I think thats going to be in commercial and clinical and then certainly how we continue to leverage the G&A functions of the company.
Okay. Thank you guys. That's really helpful and then the next unit.
Given it seems like booking deceleration was primarily because of delays do you expect bookings to be shifted.
Into the back half of the year or I guess in other words why are you comfortable with <unk> full year guidance on a constant currency non pass through basis. When Q2 bookings were light and clinical and then if you just have any thoughts on how this potentially could impact your 2023 outlook. Thanks.
Sure I'll start so as you know our backlog growth and clinical is strong and so that's what's right in front of us and we're very focused on delivering against that.
Deployment solutions backlog growth is very strong right. So the trailing 12 months indicators.
<unk> demonstrated that we have that work right in front of us. So we're very confident in.
And.
The half the back half of the year in regards to delivering against our guidance.
In regards to ongoing.
Quarterly sales.
Based on all our indicators were very very focused on making sure. We convert every opportunity that's available to us.
We are.
Obviously also evaluated the pushes the things that did get delayed in making sure that we're really making sure we can convert as many of those as possible.
At a minimum hit our normal hitting strike rate there, but we do have we do know that we have we had a very strong Q3 in 2021 as a compare and so we're very focused on making sure that we can convert as much as possible.
And he wants to add anything to that the only other thing I would add is if you look at our Q1 Q2 sales mix. It was essentially waited towards the neuroscience General medicine area, which are faster burn for us.
Well as to fill in the backlog phasing for the back half of this year and heading into 2023 compared to prior years, where we're heavily more heavily oriented towards hematology oncology.
Thanks, Michael.
Great. Thanks, that's really helpful. That's all for me.
Thank you.
Our next question comes from Casey Woodring.
Your line is open.
Hi, Thanks for taking my questions.
The full year revenue guide down aside from FX is attributable to lower Reimbursable, it's related to COVID-19 contracts rolling off faster than expected. So can you elaborate a little bit I missed what was canceled in the quarter and is there further downside for more COVID-19 roll off in the back half of the year versus what's contemplated in the guidance.
Sure so.
You are correct.
The lower revenue guidance is primarily the COVID-19 vaccine portfolio I think it was addressed in the earnings.
Prescript, where it's basically two things right we had a delay in the start of one of our Covid programs. So that was an FDA delay right the FDA delayed it and so that.
That was one piece of it and the second was we have a customer where we were managing their investigator payments and we're no longer managing those right. So those are and they took that in house. So those are the two things that occur.
Did that.
That are the Reimbursable piece there.
In regards to.
Our revenue guidance.
Nothing has changed in our underlying demand around our net service revenue underlying demand.
It is a combination of that what we just discussed and additional FX headwinds anything else, we need to add there Jason.
Yes, I would just say, we've we obviously understand the.
The frustration that the street might have with Reimbursable.
Last year, we talked in the fourth quarter about our pass through cost related to decentralized trials and remote monitoring and other things that we were seeing in investments we have made in a post COVID-19 world.
This is separate and very different from that this is specific to investigator payments and the COVID-19 portfolio, primarily as Michele outlined there are a couple of other programs within the COVID-19 portfolio that didn't necessarily impact quarter to as much that are impacting the back half that we have reflected.
We believe in addition to that we have.
Scrubbed and ensured that we do not have a further reduction in the back half.
We've certainly worked diligently to ensure that we have it where we believe that Atlanta at this point.
Got it that's helpful. And then just in terms of the step down in awards quarter over quarter on clinical.
Do you have a split in terms of.
The percentage of those delays kind of mid biotech versus large pharma.
Do you have a sense of which customers that had more of an impact there. Thank you.
Yes, I think at a macro level, we probably saw 15% to 20% more.
Decision delays than we have in prior periods just to size it from that perspective within that the lion's share was small to mid.
But there were notable.
Large pharma examples as well and that's the reason we wanted to comment on that so I would say the lion's share was on the small to mid sized.
And in quarter three.
Complete transparency.
<unk>. So we've won some we've lost some and some we feel really good about at this point, but not many have gone to a decision at this at this point in the quarter.
Thank you.
Our next question comes from Sandy Draper of Guggenheim. Your line is open.
Thanks, very much and good morning, most of my questions have been asked and answered. So I appreciate all the commentary, but maybe one follow up.
Jason I don't know if you'd be willing to sort of give some context I don't need exact numbers, but when I think about that as you said the fourth quarter write down of the Reimbursable and then what's happened here the west sort of think about it is.
In general.
Sorry.
Pre sort of Covid and vaccine trials sort of normal rate was maybe high <unk>, maybe low <unk> in terms of reimbursable. So as a percent of revenue in COVID-19 with the vaccine trials at the vaccine trials, we're pushing 40% to 50%.
And that's starting to wind down one does that seem right to you and then maybe where are you now I'm just trying to think are you back to what would be sort of with the write down and whats happened here at a normal level of Reimbursable is as a percent and that's where you're going to be going forward just help us under sort of stand how high it got where it is.
And as you said how much how scrubbed. This is that'd be really helpful. Thanks.
Yes Sandy.
If you look at the back half right and Youre going to see the lowest percentage that I think.
That we've probably seen as a percentage of our of our fee revenue.
And I do believe that is related to the COVID-19 specific opportunities, we've talked about as well as just the underlying therapeutic mix in the business.
And what we're seeing in the back half when we look at the backlog by project.
Now when you think about future years.
We're not going to comment yet on 'twenty three as Michelle mentioned earlier.
Expanded on a bit.
I do anticipate those that we will see.
'twenty three tick back up relative to the back half of this year as a percentage.
But likely not up to the high 40% range.
That we anticipated we might based on what we're seeing in the portfolio at this point, but too early to call. If you go back pre COVID-19.
And then what we were.
The portfolio of what we were managing the smid.
The profile of our customer base and percentages versus large pharma right. We've always said that given our smid heritage. The amount of smid work that we were doing that was 50% of the business. We carried a higher pass through load and that over time that would come down as we move more into large pharma.
I think we're seeing some of that now because even pre COVID-19. We were in the high <unk> low 50% per quarter in terms of Reimbursable load of revenue. So I think that continues to come down over time.
Given those dynamics to COVID-19, the large pharma mix and what we're driving at overtime.
Okay. That's really helpful. So basically back half is going to be a little bit swinging the other way, but when you think about 'twenty three it comes back up but generally you should start to get a more normalized on an annual basis level with obviously, some quarterly volatility that sort of a fair summary.
I think that's right I mean, I don't think we at this point see where we're down where some of our competitors are in terms of their reimbursable load given there.
The mix of clients and their mix of of therapeutic areas, but I do believe what you said holds up and it'll it'll.
Pick back up some but not where it was.
Great. Okay. That's helpful. That's my only question. Thanks.
Thank you again, ladies and gentlemen, if you'd like to ask a question. Please press star one one on your Touchstone telephone.
Thank you.
Next question comes from Elizabeth Anderson Evercore. Your line is open.
Hi, guys. Thanks. So much further question, maybe a quick follow up to Andy's question.
With the trial that you said was.
Covid childhood with delayed on the FDA part is that an example is that one still in your guidance for 2020 twos is there is that something that you sort of pushed off indefinitely, given sort of the more uncertain timing of that one.
So I can start yes, no. It is going to start they just had some things that are worked through.
And then we're confident it's going to start I don't know Michael if you want to give any color to that routine regulatory interactions and delays.
Moving ahead.
Sure.
Okay. That's really helpful and one of your competitors pointed out that some of the rfps that they thought that some of it is particularly in the smid.
<unk> kind of biotech range was really focus more on like funding projects are sort of scenario planning is that something that you could say you saw as well in the quarter that might explain some of the award delay or is that not some big guys.
The general rule of thumb.
So Elizabeth I think what Youre asking is was it around portfolio prioritization or.
The Rfps that we're just trying to get a sense of what was kind of going on and what it was going to cost them is that what youre asking Andy so to make sure I have the question right.
Yes, that's exactly right. Thank you okay, yeah. So.
I don't think we've seen that at any higher rate than we've ever seen that in the past I mean I think.
We feel that we that we that our opportunity is really clearly we make sure that.
We believe that these customers either I have the funding or B will be have a means to get the funding to start the work. So I don't think we've really seen anything significantly different than we have in the past, but Michael I don't know if you want to add anything.
I've been talking to our customers in depth over the last quarter about what are they seeing what are the pressures, they're facing you and right now the words that come to mind for me is to be very thoughtful very intentional.
The timing of programs going forward I'm, not hearing or seeing anything to suggest.
<unk>.
<unk>.
Anything negative.
We have to continue to support them with good strategies and good solutions and the right pricing.
But as they're making their decisions what they really talk to us about is value value value rather than should I go or not go and that's how we view the competitive marketplace right. Now is what is the value versus what is that price.
Got it that's super helpful.
Thanks Elizabeth.
Thank you.
Our next question comes from Eric Coldwell of Baird. Your line is open.
I think that was me.
Can you hear me.
Lourenco, Thanks, Eric Okay.
Yes, so two questions I'll start with Covid could you give us the COVID-19 revenue into Q4 clinical.
If there was any for commercial your estimate for Covid revenue as a percent of the total for 2022, and then what percent of backlog Covid currently makes up.
So it's a four part one question.
Okay.
Can I hand that to Jason Harris Heyer.
So I think if you look at the clinical backlog, Eric at the end of the quarter ish.
Right around two 5% of the total backlog for the year of the revenue is higher than that is probably roughly double that in terms of the total revenue contribution.
In the quarter up quarter to I don't have that top of top of mind, but I think it's relatively consistent to the full year numbers I. Just gave you in terms of contribution.
Great. Thank you.
And then the second one is a little trickier.
Last year, there was a lot of debate about.
The firm's activity around bonuses variable compensation.
This year I'm curious if you can give us any sense on how your.
Bonus accruals have played out through the year and if theres any year over year.
Meaningful Delta in performance in the first two quarters of the year based on either either easy comp or a tough comp or a change in estimate for the full year.
Yes.
Okay, Eric I'll walk you through it so let's start with <unk>.
2021.
So if you recall in the proxy it said that we did not pay the management incentive plan right and what that meant was that the senior leaders have a management incentive plan thats tied to the company performance and the senior leadership team did not get paid map, we did not fund map based on the performance metrics.
That are there too.
Fund that that bonus pool, however, and this is really important.
The board did approve a discretionary bonus pool.
For that same group of people outside of the executive leadership team and the executive leadership team did not get paid however, there was a pool for senior leaders that we're in the mess we paid that we paid our operational bonuses too that we have lots of operational bonuses to people who do the day to day work that are not part of the management incentive plan, we paid that bonus.
Obviously, we've hit our business development Commission bonuses on the business development team and the board did approve some additional long term incentives for the senior leaders that we're going to work with the ALJ to take any hotels forward to achieve our revenue and margin targets. So that's what happened in <unk>.
'twenty one.
<unk> 22, we funded the management incentive plan right.
As we do the start of every year with funded it's still funded and exactly the same amount. It was funded on January one of 2022 now having said that we have to hit our targets for the remainder of the year and until our books our audit Ed at the end of the year by our auditors and we know what our final revenue and margin is.
Well, we know what our bonus payments will be however, as of today. It is funded at the same rate. It was funded at the beginning of the year is that helpful.
Extremely helpful and just the answer I was hoping for so thank you very much.
Welcome.
Thank you.
Our next question comes from Ann Hynes Mizuho. Your line is open.
Hi, Thanks.
So my first question has to do with variable debt I know that you have swaps through March March 2023.
Remind us what happens to your variable debt exposure in 2023, and how we should think about interest expense then and can you just explain whats the delta between the high and low end of guidance range for interest expense.
Sure I will turn that over to Jason and walk you through that thanks to answer the question.
And as Jason So the the.
Variable rate debt component.
Of the portfolio right now is around 40% when the swaps roll off at the end of March that goes up to 75%.
Right.
The midpoint of our guide right now.
As I think around $81 million this year and that contemplates the one month LIBOR moving up into the mid to high 2%.
At the at the end of the year, which I think based on the curve that we look at right now when.
When you think about next year.
We're obviously very focused on how we want to take the debt stack forward and we're working on that now and evaluating the different options that we have as we move move ahead, we still like being in the 40%, 50% sort of fixed rate versus variable.
Right.
Structure, and that's where we've been so we're looking at that we're also looking at we have our term debt that.
It comes due in August of 2024, so we want to ensure that this time next year. We have worked through the different opportunities that we have and refinance that inclusive of getting up into that 40%, 50% fixed in that range. So I mean, that's how we're thinking about it.
If you look at interest expense next year and I've looked at the street from time to time to see where the models are I still think it's a little bit light last time.
Looked.
So I would think about that 75%.
<unk>, where the rates are in the curve and think about it that way.
As you think about 2023.
Alright, and just your stock's down a lot today down 18%.
Maybe just address the way do you think the street beginning it wrong, because obviously you kept your revenue guidance.
You talked with trailing 12 months, but.
Okay.
Maybe just a clarification when you say.
Book to Bill below one two times two to three quarters in a row is that quarterly or is that <unk>.
But obviously if you can just address like what do you think the street might be getting it wrong right now.
So yes, so we say quarterly book to Bill of one of our lower consistently over time, then obviously that would then start pulling the trailing 12 months book to Bill down over a course of time, yes.
That's the clarification.
Okay, I don't know, Jason if you want to add anything.
Yes, I mean I think.
Well in terms of where the street getting it wrong.
Not to say anyone's wrong, but I mean, how we think about it as the business has good growth, excluding reimbursable expenses and on a constant currency basis, right 12, 4% in the quarter and almost 12% for.
For the year.
And our adjusted EBITDA margins are are growing and getting better and cash flow is growing and getting better and our backlog growth is at 12% and clinical.
And almost 20% in deployment solutions, excluding reimbursable, we have good pipeline.
And the business right now we've talked about that we have great.
Visibility to additional preferred provider relationships we.
We have a good strategy that Michelle has articulated we're putting dollars behind our investment thesis to grow revenue and margins in the out years.
Good operational teams turnover is down and.
In the business, which is all very positive. So that's what we see and what we're focused on driving and.
Hopefully, we're able to properly articulate that to the street.
Yes.
What we're doing is resonating with our customers and things Jason described where we're investing in our people getting our retention from a low last year, 72% up into the <unk> now and now we're looking to accelerate that Morris with future investments the superpower of our organization with the solutions crossing over from clinical to commercial and medical affairs is coming to life we have.
Many examples already just in the last two quarters, where our commercial and clinical leaders are working together on strategic opportunities, creating introductions into customers that we didn't previously have.
And this obsession around delivery and quality and customers.
Is resonating our customers are saying in the current landscape, we want more of that versus what we're getting in other places. So we're in this for the long haul and we feel it's going to show through.
The coming quarters as we build into next year and just to summarize as I said in the prepared remarks I mean, we're excited about the team that we have that's going to bring that strategy forward.
I am excited about our go to market strategy.
Got it.
Confidence in Michael's ability to really deliver and commercial and clinical and the power of the combined and we're making the investments we need to to ensure that we're competitive and we feel really good about where we're going so.
Yes.
I guess that would be.
Would be my summary, I mean, we feel really good about the strategy and where we're going.
Alright. Thanks.
Okay.
Thank you okay. So.
Go ahead, I'd like to turn the call back over to Michelle Qi for any closing remarks.
So thank you everyone and I want to offer our sincere thanks to the entire Sydney as health team motivated and inspired by their commitment to our customer sites and patients we remain confident in our market positioning and we're looking forward to continuing to grow and strong profitability in 2022 and beyond as we execute our value.
Accretion plan. Thank you everyone for joining.
Thank you ladies and gentlemen, this does conclude today's conference. Thank you all for participating you may now disconnect have a great day.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
Okay.
Yes.
Okay.
Sure.